- The primary goal of the Monetary Policy Committee (MPC) in India is to –
(A) Regulate stock markets
(B) Maintain financial inclusion
(C) Target inflation
(D) Control fiscal deficit
Answer: (C)
Explanation: The Monetary Policy Committee (MPC), established by the RBI, aims to target inflation, maintaining it within a specified range (e.g., 4% ± 2% in India). This stabilizes prices, unlike stock market regulation (SEBI’s role) or fiscal deficit control (government’s role). - The “Phillips Curve” shows the trade-off between –
(A) Growth and inequality
(B) Inflation and unemployment
(C) Savings and investment
(D) Interest rate and GDP
Answer: (B)
Explanation: The Phillips Curve illustrates a short-run trade-off between inflation and unemployment, where lower unemployment may lead to higher inflation. In India, reducing unemployment through stimulus can raise prices, guiding RBI’s policy decisions. - Amartya Sen’s capability approach focuses on –
(A) GDP growth
(B) Technological efficiency
(C) Freedom and human potential
(D) Fiscal prudence
Answer: (C)
Explanation: Amartya Sen’s capability approach emphasizes expanding human freedoms and potential through health, education, and opportunities. In India, this approach underpins policies like free education, prioritizing human development over mere GDP growth. - Green GDP accounts for –
(A) Agricultural output
(B) Environmental degradation
(C) Employment growth
(D) Military expenditure
Answer: (B)
Explanation: Green GDP adjusts GDP for environmental degradation costs, like pollution or resource depletion. In India, factoring in air pollution’s economic impact provides a more sustainable measure of growth, unlike raw agricultural or military spending data. - A progressive tax system aims to –
(A) Encourage saving
(B) Reduce poverty
(C) Redistribute income
(D) Promote inflation
Answer: (C)
Explanation: A progressive tax system, like India’s income tax with higher rates for higher earners, redistributes income to reduce inequality. While it may indirectly reduce poverty, its primary goal is equitable income distribution, not savings or inflation. - The primary sector in India includes –
(A) Education and health
(B) Manufacturing and construction
(C) Agriculture, forestry, and fishing
(D) Trade and transport
Answer: (C)
Explanation: The primary sector involves natural resource-based activities like agriculture, forestry, and fishing. In India, this sector employs a significant workforce, producing food and raw materials, distinct from secondary (manufacturing) or tertiary (services) sectors. - An increase in public debt is most likely to –
(A) Raise inflation
(B) Decrease fiscal space
(C) Improve balance of payments
(D) Lower unemployment automatically
Answer: (B)
Explanation: Rising public debt in India reduces fiscal space, limiting funds for new spending due to higher interest payments. While it may indirectly affect inflation or employment, its primary impact is constraining budgetary flexibility, not balance of payments. - HDI does not include –
(A) Per capita income
(B) Life expectancy
(C) Literacy
(D) Consumer price index
Answer: (D)
Explanation: The Human Development Index (HDI) includes per capita income, life expectancy, and education (literacy and schooling). Consumer price index, measuring inflation, is excluded, as HDI focuses on human development metrics in India and globally. - In India, devaluation of the rupee is undertaken by –
(A) SEBI
(B) RBI
(C) Ministry of Finance
(D) Government of India
Answer: (D)
Explanation: Devaluation, a deliberate reduction in the rupee’s value under a fixed exchange rate regime, is a government decision, typically coordinated with the RBI. In India’s 1991 crisis, the government devalued the rupee to boost exports, not SEBI or RBI alone. - Automatic stabilizers in fiscal policy are –
(A) Exports and imports
(B) GDP and inflation
(C) Taxes and transfer payments
(D) Monetary and fiscal rules
Answer: (C)
Explanation: Automatic stabilizers, like progressive taxes and transfer payments (e.g., unemployment benefits), adjust naturally to economic cycles. In India, higher incomes increase tax revenue, and welfare payments rise during downturns, stabilizing the economy without policy changes. - The Census of India is conducted every –
(A) 5 years
(B) 7 years
(C) 10 years
(D) 12 years
Answer: (C)
Explanation: The Census of India, conducted by the Registrar General, occurs every 10 years (e.g., 2011, 2021). It collects demographic and economic data, guiding policy decisions on population, literacy, and employment trends. - The Golden Rule of Public Finance states that –
(A) Deficits are bad
(B) Borrowings should finance only capital expenditure
(C) Surplus should be maintained
(D) Subsidies must be eliminated
Answer: (B)
Explanation: The Golden Rule of Public Finance suggests borrowings should fund capital expenditure (e.g., infrastructure) rather than revenue expenditure (e.g., salaries). In India, this promotes sustainable growth by investing in productive assets, avoiding deficit-financed consumption. - The Liquidity Adjustment Facility (LAF) is used by RBI to –
(A) Adjust forex reserves
(B) Stabilize inflation
(C) Manage liquidity in banking system
(D) Issue bonds
Answer: (C)
Explanation: The RBI’s Liquidity Adjustment Facility (LAF) manages banking system liquidity through repo and reverse repo operations. In India, LAF helps banks borrow or park funds, ensuring stable money supply, distinct from forex or bond issuance roles. - In India, disinvestment means –
(A) Reducing government equity in PSUs
(B) Selling assets of private firms
(C) FDI in agriculture
(D) Monetizing exports
Answer: (A)
Explanation: Disinvestment involves the government reducing equity in Public Sector Undertakings (PSUs), like selling shares in ONGC. In India, this raises funds and promotes efficiency, unlike private asset sales or FDI policies. - The Capital Output Ratio represents –
(A) Investment needed to produce one unit of output
(B) Fiscal deficit over GDP
(C) Ratio of tax to investment
(D) Output per unit of labor
Answer: (A)
Explanation: The Capital Output Ratio (ICOR) measures investment required to generate one unit of output. In India, a high ICOR (e.g., 4:1) indicates capital-intensive growth, guiding planning for infrastructure or industrial projects. - Which organization computes the Index of Industrial Production (IIP) in India?
(A) SEBI
(B) RBI
(C) NSO (MoSPI)
(D) Ministry of Finance
Answer: (C)
Explanation: The National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) computes the IIP, tracking industrial output in India’s manufacturing, mining, and electricity sectors, aiding economic analysis. - Moral suasion as a tool of credit control implies –
(A) Tax incentives
(B) Legal threats
(C) Persuasion by central bank
(D) Bond auctions
Answer: (C)
Explanation: Moral suasion involves the RBI persuading banks to align lending with policy goals, like prioritizing MSME loans in India. As a qualitative tool, it relies on dialogue, not legal mandates, taxes, or bond auctions. - Net National Product at factor cost is also called –
(A) National Income
(B) Gross Domestic Product
(C) Disposable income
(D) Net Domestic Product
Answer: (A)
Explanation: Net National Product (NNP) at factor cost, adjusted for depreciation and net indirect taxes, is termed National Income. In India, it represents total income from production, including wages, rent, and profits, distinct from GDP or disposable income. - The shadow price in economics refers to –
(A) Market price
(B) Inflation-adjusted price
(C) Price of non-marketed goods
(D) Nominal price
Answer: (C)
Explanation: Shadow price reflects the economic value of non-marketed goods or resources, like clean air in India. Used in cost-benefit analysis, it estimates societal costs or benefits, unlike market or nominal prices driven by supply and demand. - Human Capital Formation involves –
(A) Machinery building
(B) Infrastructure construction
(C) Health and education investment
(D) Investment in natural resources
Answer: (C)
Explanation: Human capital formation involves investing in health and education to enhance skills and productivity. In India, programs like Sarva Shiksha Abhiyan boost literacy, increasing workforce capability, unlike physical or natural resource investments. - Value Added Tax (VAT) is levied on –
(A) Final sale price
(B) Import price
(C) Value added at each stage
(D) Agricultural produce
Answer: (C)
Explanation: VAT, now largely replaced by GST in India, is levied on the value added at each production stage, avoiding double taxation. For example, a manufacturer pays VAT on the difference between input and output value, ensuring fair taxation. - The terms of trade worsen for a country when –
(A) Export prices fall relative to import prices
(B) Imports decrease
(C) Trade surplus rises
(D) Forex reserves rise
Answer: (A)
Explanation: Terms of trade worsen when export prices fall relative to import prices, reducing purchasing power. In India, if oil import prices rise while textile export prices drop, the country needs more exports to afford imports, impacting trade balance. - Which of the following is not a function of SEBI?
(A) Regulate capital markets
(B) Protect investor interests
(C) Issue currency
(D) Monitor mutual funds
Answer: (C)
Explanation: The Securities and Exchange Board of India (SEBI) regulates capital markets, protects investors, and monitors mutual funds. Currency issuance is the RBI’s role, as seen in India’s rupee notes, distinct from SEBI’s financial oversight functions. - Which of the following causes a rightward shift in aggregate demand?
(A) Fall in government spending
(B) Increase in interest rates
(C) Fall in consumer confidence
(D) Tax cuts
Answer: (D)
Explanation: Tax cuts increase disposable income, boosting consumption and shifting aggregate demand rightward. In India, reducing income tax rates encourages spending, unlike falling government spending or rising interest rates, which reduce demand. - Supply-side policies aim to –
(A) Control inflation directly
(B) Improve production capacity
(C) Increase fiscal deficit
(D) Boost imports
Answer: (B)
Explanation: Supply-side policies enhance production capacity through tax reductions, deregulation, or infrastructure investment. In India, improving power supply boosts industrial output, distinct from demand-side inflation control or fiscal deficit impacts. - The GDP deflator measures –
(A) Nominal to real GDP
(B) Tax incidence
(C) Core inflation
(D) Income equality
Answer: (A)
Explanation: The GDP deflator measures the price level by dividing nominal GDP by real GDP (×100), reflecting inflation across all goods. In India, a deflator of 110 indicates a 10% price rise since the base year, unlike specific inflation or equality metrics. - Monopsony is a market with –
(A) One buyer, many sellers
(B) Many buyers, one seller
(C) Two buyers and two sellers
(D) Price takers on both sides
Answer: (A)
Explanation: Monopsony features one buyer and many sellers, giving the buyer market power. In India, a single government procurement agency buying crops from numerous farmers exemplifies monopsony, unlike monopoly (one seller) or competitive markets. - “Hicksian substitution effect” focuses on –
(A) Income effect of price change
(B) Change in utility
(C) Substitution while maintaining same utility
(D) Price elasticity
Answer: (C)
Explanation: The Hicksian substitution effect measures how consumers substitute goods when prices change, maintaining constant utility. In India, if rice prices rise, consumers may switch to wheat, keeping satisfaction constant, isolating the substitution from income effects. - Fiscal stimulus is generally used to –
(A) Control inflation
(B) Curb exports
(C) Revive economic growth
(D) Encourage saving
Answer: (C)
Explanation: Fiscal stimulus, like increased government spending or tax cuts in India, revives economic growth by boosting demand during slowdowns. It contrasts with policies controlling inflation or encouraging saving, which may reduce demand. - Which of the following represents stock rather than flow?
(A) Income
(B) Investment
(C) Capital
(D) Consumption
Answer: (C)
Explanation: Capital is a stock, a fixed amount at a point in time (e.g., India’s factory machinery). Income, investment, and consumption are flows, measured over time, reflecting ongoing economic activities. - Underemployment equilibrium occurs when –
(A) Output exceeds full employment
(B) Resources are fully used
(C) Less than full employment persists
(D) Inflation is very high
Answer: (C)
Explanation: Underemployment equilibrium, a Keynesian concept, occurs when the economy stabilizes below full employment, with unused resources. In India, persistent joblessness despite growth reflects this, requiring intervention to boost demand. - Balance of Trade includes –
(A) Only goods
(B) Goods and services
(C) Services only
(D) Financial flows
Answer: (A)
Explanation: The Balance of Trade includes only goods (exports minus imports). In India, a trade deficit arises from high oil imports, distinct from the broader Balance of Payments, which includes services and financial flows. - Structural unemployment occurs due to –
(A) Lack of demand
(B) Business cycles
(C) Skill mismatch
(D) High wages
Answer: (C)
Explanation: Structural unemployment results from a mismatch between workers’ skills and job requirements. In India, technology shifts may leave unskilled workers jobless, unlike cyclical unemployment from demand fluctuations or wage issues. - The Lorenz Curve is used to show –
(A) Inflation trend
(B) Production pattern
(C) Income inequality
(D) Balance of trade
Answer: (C)
Explanation: The Lorenz Curve illustrates income inequality by plotting cumulative income against population. In India, a curve far from the equality line indicates high disparity, guiding policies like progressive taxation to address inequality. - The Marginal Efficiency of Capital (MEC) is –
(A) MP of labor
(B) Return on capital
(C) Cost of capital
(D) Output per unit of land
Answer: (B)
Explanation: Marginal Efficiency of Capital (MEC) measures the expected return on additional capital investment. In India, a high MEC for a new factory encourages investment, reflecting profitability, unlike labor or land productivity metrics. - Which of the following is not a component of Gross Capital Formation?
(A) Machinery investment
(B) Inventory changes
(C) Land use
(D) Construction
Answer: (C)
Explanation: Gross Capital Formation includes machinery investment, inventory changes, and construction, contributing to capital stock. Land use, while important, is not part of this measure in India, as it doesn’t create new capital. - The Fisher Equation relates –
(A) Inflation and interest rate
(B) Money and velocity
(C) Unemployment and inflation
(D) Tax and output
Answer: (A)
Explanation: The Fisher Equation (i = r + π) links nominal interest rate (i) to real interest rate (r) and expected inflation (π). In India, if inflation is 5% and real rate is 2%, nominal rates are 7%, guiding borrowing and lending. - The multiplier becomes ineffective when –
(A) MPC is 1
(B) MPC is 0
(C) Inflation is rising
(D) Investment is falling
Answer: (B)
Explanation: The multiplier (1/(1 – MPC)) is ineffective when MPC is 0, as no additional consumption occurs from income increases. In India, if all income is saved (MPC = 0), spending doesn’t multiply, halting economic stimulus. - A revenue-neutral tax reform implies –
(A) No change in tax structure
(B) Same total revenue after tax changes
(C) Zero fiscal deficit
(D) Balanced budget
Answer: (B)
Explanation: Revenue-neutral tax reform maintains the same total revenue despite changes in tax structure. In India, lowering income tax rates while broadening the tax base (e.g., via GST) ensures revenue stability, unlike deficit or budget balancing. - Import substitution industrialization aims to –
(A) Promote exports
(B) Reduce dependency on imports
(C) Increase foreign aid
(D) Encourage outsourcing
Answer: (B)
Explanation: Import substitution industrialization (ISI) reduces reliance on imports by promoting domestic production. In India’s pre-1991 era, ISI encouraged local manufacturing of goods like textiles, boosting self-reliance, unlike export promotion or outsourcing. - In India, the largest share of employment is in –
(A) Services
(B) Manufacturing
(C) Agriculture
(D) Construction
Answer: (C)
Explanation: Agriculture employs the largest share of India’s workforce, particularly in rural areas, despite declining GDP contribution. Programs like MNREGA support agricultural workers, contrasting with growing service and manufacturing sectors. - The income method of calculating national income includes –
(A) Wages and salaries
(B) Rent
(C) Profits
(D) All of the above
Answer: (D)
Explanation: The income method sums factor incomes—wages, salaries, rent, interest, and profits—to calculate national income. In India, this captures earnings from labor, land, and capital, providing a comprehensive measure of economic activity. - Disposable income is –
(A) GDP – indirect taxes
(B) National income – depreciation
(C) Personal income – direct taxes
(D) Private income – corporate tax
Answer: (C)
Explanation: Disposable income is personal income minus direct taxes (e.g., income tax in India), reflecting funds available for consumption or saving. It differs from GDP or national income, which include broader economic aggregates. - An increase in marginal cost results in –
(A) Rising profits
(B) Falling average cost
(C) Decreasing supply
(D) Lower marginal utility
Answer: (C)
Explanation: Rising marginal cost increases production costs, reducing supply as firms produce less at higher prices. In India, if raw material costs rise, a factory cuts output, shifting the supply curve leftward, unlike profit or utility effects. - A perfectly elastic demand curve is –
(A) Downward sloping
(B) Vertical
(C) Horizontal
(D) U-shaped
Answer: (C)
Explanation: A perfectly elastic demand curve is horizontal, indicating consumers buy any quantity at a fixed price but none above it. In India’s competitive agricultural markets, farmers face this, selling at market prices with infinite elasticity. - Tariffs are imposed to –
(A) Promote imports
(B) Increase revenue and protect domestic industries
(C) Reduce exports
(D) Encourage outsourcing
Answer: (B)
Explanation: Tariffs, like India’s duties on imported electronics, raise revenue and protect domestic industries by making imports costlier. This supports local producers, unlike policies promoting imports or outsourcing. - Inclusive growth implies –
(A) GDP growth only
(B) Growth with equity and participation
(C) Urban growth only
(D) Export-led growth
Answer: (B)
Explanation: Inclusive growth combines economic growth with equity and participation, ensuring benefits reach all sections. In India, schemes like MNREGA promote inclusive growth by providing rural jobs, unlike GDP-focused or urban-centric growth. - The first census in India was conducted in –
(A) 1872
(B) 1901
(C) 1921
(D) 1951
Answer: (A)
Explanation: India’s first census was conducted in 1872 under British rule, establishing a systematic population count. Subsequent censuses, like 1951 post-independence, built on this, providing data for planning and development. - Which is not a component of aggregate demand?
(A) Consumption
(B) Government spending
(C) Investment
(D) Tax collection
Answer: (D)
Explanation: Aggregate demand comprises consumption, investment, government spending, and net exports. Tax collection in India affects disposable income but isn’t a direct component, unlike spending categories driving economic activity. - Twin deficit hypothesis refers to –
(A) Fiscal deficit and revenue deficit
(B) Current account and fiscal deficits
(C) Budget and capital deficits
(D) Trade and debt deficits
Answer: (B)
Explanation: The twin deficit hypothesis links fiscal deficits (excess government spending) to current account deficits (excess imports). In India, high fiscal deficits from borrowing may increase imports, worsening the current account balance.